<PAGE>
(R)
The First Australia
Fund, Inc.
- -------------------------------------------------------------------
Semi-Annual Report
April 30, 1999
Highlights
-------------------------------------------
- All Dissenting Proposals Soundly
Defeated.
- Total market return of 72.4% since August
ALL AMOUNTS ARE U.S. DOLLARS UNLESS OTHERWISE STATED.
Managed by EquitiLink International Management Limited.
<PAGE>
LETTER TO SHAREHOLDERS
June 11, 1999
Dear Shareholder,
This Report covers the activities of The First Australia Fund, Inc. for the
six months ended April 30, 1999. Included is a review of the Australian economy
and investment markets, together with an overview of the Fund's investments
prepared by the Investment Manager, EquitiLink International Management Limited.
Annual Shareholders Meeting--All Dissenting Proposals Soundly Defeated
Shareholders showed their strong endorsement for management at the Fund's
Annual Shareholders Meeting on April 23. The Directors were overwhelmingly
re-elected and all dissenting proposals were soundly defeated. According to the
Independent Inspectors of election, each of the Fund's Class II Directors
received at least 9.5 million votes, while the proposed dissident slate of
directors each received less than 1.8 million votes. All other dissident
proposals were defeated by a margin of two to one or more.
Performance--Total Market Return of 72.4% since August 1998
The Board of the Fund and management are pleased that shareholders
overwhelmingly recognize the Fund's performance since the new portfolio team was
implemented last year.
The following chart is shown in response to shareholder questions regarding
the performance of the Fund relative to the S&P 500 Accumulation Index. It was
included in material sent to shareholders prior to and presented at the April
23, 1999 Annual Shareholders Meeting. The Fund's total market return since the
new management team was fully implemented in August 1998 has been 72.4% compared
with the S&P 500 Accumulation Index which returned 40.7% over the same period.
FIRST AUSTRALIA FUND vs S&P 500
Total Return with Dividends Reinvested
[CHART TO COME]
1
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Substantial Share Purchase
The EquitiLink Group recently purchased 1,624,627 shares, or 9.5% of the
Fund. These shares were acquired for investment purposes in light of the
Directors' confidence in the strong growth prospects for the Australian equity
market and the Fund's effectiveness for investing in Australia. At the Annual
Shareholders Meeting, these shares were voted in accordance with the
recommendation of the Board of Directors of the Fund.
Distribution
At the meeting of the Board of Directors held on June 10, a distribution of
20 cents per share was declared for the quarter ending June 30, payable on July
16. This followed 20 cents per share paid on April 16. The Fund's distribution
policy has been set at 9% per annum of NAV for the 1999 year. Over the past
twelve months, the Fund has paid a total of 80.5 cents per share in
distributions, or an annualized distribution yield of 10.5%, based on the share
price of $7.69 as of the date of this report.
Net Asset Value--What It Means for Shareholders
One of the proposals put forward by the minority dissenters at the Fund's
Annual Shareholder Meeting, was that shareholders be provided with NAV for their
shares within sixty days. Clearly this was an unrealistic and unattainable goal
and the vast majority of shareholders recognized it to be so.
The current NAV of the Fund's portfolio assumes that the Fund will continue
as a 'going concern', i.e., the Fund will continue investing, reinvesting, and
selling portfolio securities. Were the Fund to announce a substantial
liquidation of the portfolio in order to meet shareholder redemption requests,
the market value of the Fund's portfolio securities could be less than the value
prevailing prior to the announcement of liquidation. In addition, a forced
liquidation of the portfolio could generate taxes on capital gains realized,
which would have to be paid either by the Fund or its shareholders. The
liquidation would also cause the Fund to incur transactional costs as well as
legal and corporate costs. What this means for shareholders is that the NAV of
the Fund after a liquidation is likely to be less than the NAV of the Fund
before a liquidation. Investors should therefore be aware of this situation when
assessing the value of their investment under circumstances different from those
of a 'going concern'.
The independent Directors concluded that it is in the Fund's best interest to
continue as an ongoing entity for serious long-term investors in Australia.
For information about the Fund, please telephone investor relations at Dewe
Rogerson, toll-free on 1-800-323-9995.
Yours sincerely,
Laurence S. Freedman Brian M. Sherman
Chairman President
Explore EquitiLink's Website
http//:www.equitilink.com
2
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Dividend Reinvestment and Cash Purchase Plan
Participation in the Fund's Dividend Reinvestment and Cash Purchase Plan
('the Plan') allows you to automatically re-invest your distributions in shares
of the Fund's common stock at favorable commission rates. The Plan also enables
you to make additional cash investments in shares of at least $100 per month.
Under this arrangement, the Plan Agent will purchase shares for you on the stock
exchange or otherwise on the open market on or about the 15th of each month.
As a Participant in the Plan, you will have the convenience of:
Automatic reinvestment--the Plan Agent will automatically reinvest your
distributions, allowing you to gradually grow your holdings in the Fund;
Lower costs--shares are purchased on your behalf under the Plan at reduced
brokerage rates;
Convenience--the Plan Agent will hold your shares in non-certificated form
and will provide a detailed record of your holdings at the end of each
distribution period.
To request a brochure containing information on the Plan, together with an
authorization form, please telephone investor relations at Dewe Rogerson,
toll-free on 1-800-323-9995.
REPORT BY THE INVESTMENT MANAGER
Share Price Performance
Over the six-month reporting period, the Fund's total market return was
30.4%, compared with the S&P 500 Accumulation Index return of 22.3%. Over three
months, the Fund's total market return was 21.1%, compared with the Index return
of 4.7%. The Fund's stock closed at $8.13 per share at the end of the period.
The Fund's total market return since the new Management team was fully
implemented in August 1998 is 72.4%, compared with the S&P 500 Index which
returned 40.7%.
NAV Performance
The Fund's NAV increased by 26.0% over the six months assuming reinvestment
of distributions.
Currency
The Australian dollar strengthened 5.8% against the U.S. dollar during the
reporting period.
Investment Strategy
The Fund increased its exposure to the Resource sector over the six months,
to be neutrally weighted compared with the ASX All Ordinaries Index. The
Industrial sector has outperformed the Resource sector over the period but both
performed very strongly. The Fund will remain relatively fully invested.
Distribution Policy
Over the past 12-month period, the Fund paid a total of 80.5 cents per share
in distributions which equates to an annualized cash distribution yield of
10.5%, based on the share price of $7.69 as of the date of this report.
At the meeting of the Board of Directors held on June 10, 1999, a
distribution of 20 cents per share was declared for the quarter ending June 30,
1999, payable in July 1999.
3
<PAGE>
Portfolio Composition
The following chart summarizes the composition of the Fund's portfolio,
expressed as a percentage of net assets. At April 30, 1999, the Fund held 83% of
its net assets in industrial stocks, 16% in resource stocks, and 1% in cash.
[CHART TO COME]
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings at April 30, 1999.
Telstra Corporation Limited 10.5% of total assets
Australia's dominant telecommunications carrier, providing a full range of
telecommunications services. The company will continue to participate in a
rapidly growing market. Although deregulation of the Australian
telecommunications market has increased competition and may lead to some erosion
of Telstra's market share, profitability will grow strongly as costs are
reduced.
National Australia Bank Limited (NAB) 9.7% of total assets
Australia's largest full service banking group, with significant
operations in Australia, New Zealand, the U.K. and U.S. NAB has grown its
international retail banking presence through acquisitions while maintaining
market leadership in Australia. The recent interim result showed strong growth
in banking fees and commissions, as well as continuing emphasis on expense
reduction.
Westpac Banking Corporation Limited (WBC) 7.1% of total assets
The second largest banking group in Australia, offering retail and
wholesale banking services to Australia and New Zealand. Management remains
focussed on optimizing its domestic banking business and integrating recent
acquisitions. Sound capital management should drive earnings per share growth.
Australia & New Zealand Banking Group Limited (ANZ) 6.0% of total assets
Australia's fourth largest banking group, offering retail and wholesale
banking services to Australia, New Zealand and Asia. Recent management changes
have focused on cost control and growing non-interest income. Domestic asset
quality and interest margins are trending favorably, underpinning a sound
outlook for profitability.
4
<PAGE>
News Corporation Limited 5.7% of total assets
News Corporation is a global, vertically-integrated entertainment and
media company. It produces film and television entertainment through the Fox
brand name and also has significant interests in several major broadcast
platforms such as B-Sky-B in the U.K. and the Fox TV network in the U.S. News
Corporation has also entered into joint venture arrangements with other
media/telecommunications companies in order to reduce financial risk and expand
its global market presence.
Fosters Brewing Group Limited 4.1% of total assets
An international beverage group focusing on beer, wine and other alcoholic
beverages. Following the recent disposal of its holding in Molson Canada,
Fosters derives the majority of its earnings from its Australian liquor
operations.
Rio Tinto Limited 3.6% of total assets
The world's largest mining company, with assets located in North America,
Europe, Southern Africa, South America, Australia and New Zealand. The company
pursues world class ore bodies, with particular emphasis on copper, gold,
diamonds, iron ore and coal. Strong financial management is a core competency of
the group.
Brambles Industries Limited 3.4% of total assets
Brambles Industries is a geographically diversified group operating in
Australia, Europe and North America. Major activities include equipment rental,
waste management, palette management (CHEP), security, industrial service,
records management, and other transport-related services. The trend towards
out-sourcing industrial services is underwriting strong growth for Brambles in
its core operations.
Lend Lease Corporation Limited 3.2% of total assets
Australia's largest integrated property and financial services group. The
company has achieved 23 consecutive years of profit growth. It continues to
leverage off its strong market presence in Australia with increasing involvement
internationally. The group is involved in project management, design and
construction, property development and facilities management. It is also a major
provider of financial services--funds management and life insurance
products--through the MLC group. The company is well positioned to maintain
growth in profitability.
Lang Corporation Limited 2.3% of total assets
Lang Corporation is the owner of Australia's largest stevedoring company,
Patrick, and TDG Autocare. Having resolved Patrick's union problems, the market
will increasingly focus on the attractiveness of the stevedore business. Given
that business is a duopoly, with high barriers to entry and steady long-term
growth, the prospects for Lang Corporation are positive.
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
The growth performance of the Australian economy exceeded most expectations
in 1998. This appears to have continued through early 1999 to date, with
surprisingly strong data continuing to build a positive picture. Domestic
5
<PAGE>
demand has been the key driver of the economy, more than offsetting the
Asian-induced drag from net exports. This has been buoyed by high consumer
confidence, falling interest rates and rising household wealth.
As with the U.S., inflation has remained lower than generally expected, well
below 2% over the last year, despite strong growth. A further moderation in
wages growth recently, suggests that the positive inflation outlook is unlikely
to be disrupted soon.
Stock Market
The Australian stock market climbed to its all time highs over the six
months, supported by strong economic data. Over the six months to April 30,
1999, the ASX All Ordinaries Accumulation Index increased by 26.3% in U.S.
dollar terms.
Industrial sector stocks pushed the market higher, with the Miscellaneous
Industrials, Transport and Banking & Finance stocks increasing in excess of 30%
over the period.
Currency
The Australian dollar strengthened against the U.S. dollar during the
reporting period. Expectations of stronger global industrial production and
firmer commodity prices have induced positive sentiment towards the currency,
which closed the quarter at 66.12 cents. This represented a gain of 5.8% against
the U.S. dollar over the six months.
The resilience of Australian economic growth is a key positive for the
currency in the near term. Looking further out, improving global growth should
lead commodity prices higher, supporting the Australian dollar.
EquitiLink International Management Limited
6
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
April 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--100.1%
Common and Preferred Stocks--100.1%
Diversified Industries--25.4%
1,735,398 Australian Infrastructure
Group..................... $ 2,534,895
750,000 CSR Limited................. 2,002,678
1,110,000 Fairfax (John) Holdings
Limited................... 3,074,012
500,000 Faulding (F.H.) & Company
Limited................... 2,809,037
2,425,000 Fosters Brewing Group
Limited................... 7,065,158
2,700,000 Futuris Corporation
Limited................... 3,908,197
1,200,000 Lang Corporation Limited.... 3,933,974
845,000 Leighton Holdings Limited... 3,183,465
410,000 Lend Lease Corporation
Limited................... 5,520,868
1,800,000 MTM Entertainment Trust*.... 1,154,018
560,000 Orica Limited............... 3,255,681
780,000 Pioneer International
Limited................... 1,902,346
110,000 Publishing & Broadcasting
Limited................... 738,459
500,000 Toll Holdings Limited
Convertible Preferred
Stock..................... 1,946,497
------------
43,029,285
------------
Resources And Mining--16.5%
1,051,000 Acacia Resources Limited.... 1,458,783
717,000D Anaconda Nickel Limited*.... 1,421,703
310,000 Broken Hill Proprietary
Company Limited........... 3,500,417
480,000 Comalco Limited............. 2,046,301
2,810,000 M.I.M. Holdings Limited..... 1,652,970
830,700 Newcrest Mining Limited*.... 1,905,207
600,000 North Limited............... 1,269,024
824,400 Orogen Minerals Limited..... 1,002,592
366,800 Rio Tinto Limited........... 6,170,007
475,000 Santos Limited.............. 1,632,546
1,030,000 WMC Limited................. 4,445,483
223,440 Woodside Petroleum
Limited................... 1,521,131
------------
28,026,164
------------
Services--58.2%
325,574 Adelaide Bank Limited....... 1,243,787
1,300,000 Australia & New Zealand
Banking Group Limited..... 10,285,041
195,000 Brambles Industries
Limited................... 5,723,149
940,000 Cable & Wireless Optus
Limited*.................. 2,112,396
636,500 Colonial Limited............ 2,393,752
495,000 Data Advantage Limited*..... 1,452,636
429,500 Formida Holdings Limited*... 567,756
1,300,000 Jupiters Limited............ 3,265,093
850,000 National Australia Bank
Limited................... 16,528,374
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
1,550,000 National Mutual Holdings
Limited................... $ 2,725,096
1,170,000 News Corporation Limited.... 9,793,215
1,230,000 Pacific Magazines & Printing
Limited................... 2,764,092
1,290,000 Qantas Airways Limited...... 3,538,395
650,000 QBE Insurance Group
Limited................... 2,904,214
3,300,000Pound Telstra Corporation
Limited*.................. 17,885,304
1,900,000D Village Roadshow Limited
Voting Preferred Stock.... 3,202,302
1,600,000 Westpac Banking Corporation
Limited................... 12,199,549
------------
98,584,151
------------
Total common and preferred
stocks
(cost US$138,740,857)..... 169,639,600
------------
Principal
Amount
(000) SHORT-TERM INVESTMENTS--0.4%
Demand Deposits--0.3%
A$ 833 Banque Nationale de Paris,
Demand Deposit, 4.40%..... 550,551
2 State Street Bank & Trust
Company, Demand Deposit,
4.05%..................... 1,413
------------
Total demand deposits
(cost US$545,905)......... 551,964
------------
Repurchase Agreement--0.1%
US$ 124 Repurchase Agreement, State
Street Bank & Trust
Company, 4.70% dated
4/30/99, due 5/4/99 in
the amount of $124,065
(cost $124,000;
collateralized by $95,000
U.S. Treasury bill, due
8/15/17; value including
accrued
interest--US$128,725)..... 124,000
------------
Total short-term investments
(cost US$669,905)......... 675,964
------------
Total Investments--100.5%
(cost US$139,410,762)..... 170,315,564
Liabilities in excess of
other
assets--(0.5%)............ (853,469)
------------
Net Assets--100%............ $169,462,095
------------
------------
</TABLE>
- ------------------
* Non-income producing security.
D Portion of securities on loan.
Pound Fair valued security.
See Notes to Financial Statements.
7
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
April 30, 1999
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$139,410,762)........................ $170,315,564
Foreign currency, at value (cost
$224,202)............................ 222,471
Cash................................... 193
Receivable for investments sold........ 88,398
Dividends and interest receivable...... 20,691
Other assets........................... 14,478
------------
Total assets....................... 170,661,795
------------
Liabilities
Payable for investments purchased...... 184,448
Accrued expenses and other
liabilities.......................... 867,983
Investment management fee payable...... 139,374
Administration fee payable............. 7,895
------------
Total liabilities.................. 1,199,700
------------
Net Assets $169,462,095
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 171,900
Paid-in capital in excess of par..... 152,880,695
------------
153,052,595
Distributions in excess of net
investment income.................. (1,579,627)
Accumulated net realized gain on
investments.......................... 103,803
Net unrealized appreciation on
investments.......................... 29,379,910
Accumulated net realized and
unrealized foreign exchange loss... (11,494,586)
------------
Net assets........................... $169,462,095
------------
------------
Net asset value per share:
($169,462,095 / 17,189,998 shares of
common stock issued and
outstanding)......................... $9.86
------------
------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Six months ended April 30, 1999
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $47,951)................... $ 1,953,199
Interest.............................. 107,281
Income from securities loaned, net.... 15,944
------------
Total income........................ 2,076,424
------------
Expenses
Investment management fee............. 684,996
Legal fees and expenses............... 335,000
Shareholder relations and
communications........................ 305,000
Independent accountant's fees and
expenses.............................. 237,000
Directors' fees and expenses.......... 168,000
Custodian's fees and expenses......... 103,000
Administration fee.................... 38,273
Transfer agent's fees and expenses.... 19,000
Insurance expense..................... 7,000
Miscellaneous......................... 20,503
------------
Total operating expenses.............. 1,917,772
------------
Net investment income before excise
tax................................... 158,652
Excise tax.............................. (44,644)
------------
Net investment income................... 114,008
------------
Realized and Unrealized Gains
on Investments and Foreign Currencies
Net realized gain on investment
transactions.......................... 783,971
Net change in unrealized appreciation on
investments........................... 25,332,359
------------
Net gain on investments................. 26,116,330
------------
Net increase in net assets resulting
from operations before net foreign
exchange gain......................... 26,230,338
Net realized and unrealized foreign
exchange gain......................... 8,313,297
------------
Net Increase In Net Assets
Resulting From Operations............... $ 34,543,635
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
8
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) April 30, October 31,
in Net Assets 1999 1998
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 114,008 $ 3,569,719
Net realized gain on
investments........... 783,971 10,321,183
Net change in unrealized
appreciation on
investments........... 25,332,359 1,437,050
------------ ------------
Net increase in net
assets resulting from
operations before net
foreign exchange
gain.................. 26,230,338 15,327,952
Net realized and
unrealized foreign
exchange gain (loss).. 8,313,297 (18,745,223)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ 34,543,635 (3,417,271)
Dividends to shareholders
from net investment
income.................. (2,372,130) (3,991,702)
Distributions to
shareholders from net
realized capital
gains................... (4,503,686) (11,207,892)
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... -- 988,653
------------ ------------
Total increase
(decrease).............. 27,667,819 (17,628,212)
Net Assets
Beginning of period....... 141,794,276 159,422,488
------------ ------------
End of period............. $169,462,095 $141,794,276
------------ ------------
------------ ------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Notes to Financial Statements
(Unaudited)
- ----------------------------------------------------------
The First Australia Fund, Inc. (the 'Fund') is a closed-end, nondiversified
management investment company incorporated in Maryland on September 30, 1985.
The Fund's principal investment objective is long-term capital appreciation
through investment primarily in equity securities of Australian companies listed
on Australian stock exchanges. The Fund's secondary investment objective is
current income. It is expected that normally at least 65% of the Fund's total
assets will be invested in equity securities listed on Australian stock
exchanges and that current income will be derived primarily from dividends and
interest on Australian corporate and governmental securities. The ability of
issuers of debt securities, including foreign currency balances on deposit with
the Fund's Australian subcustodian bank, held by the Fund to meet their
obligations may be affected by economic or political developments in a specific
industry or region.
Note 1. Accounting The following is a summary of
significant accounting policies Policies
followed by the Fund in the preparation of its
financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with United States generally accepted accounting principles using the
United States dollar as both the functional and reporting currency.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last reported sales
prices. If there is no sales price on the date of valuation, then investments
are valued at the most recently available sales price or at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Repurchase Agreements: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Fund's policy that its custodian
take possession of the underlying collateral securities, the value of which
exceeds the principal amount of the repurchase transaction, including accrued
interest. To the extent that any repurchase transaction
See Notes to Financial Statements.
9
<PAGE>
exceeds one business day, the collateral is valued on a daily basis to determine
its adequacy. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: Australian dollar ('A$') amounts are translated
into United States dollars ('US$') on the following basis:
(i) market value of investment securities, other assets and liabilities at
the exchange rates at the end of the reporting period;
(ii) purchases and sales of investment securities, income and expenses at
the rate of exchange prevailing on the respective dates of such
transactions.
The Fund isolates that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of securities held at April 30, 1999.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the reporting period.
Net realized and unrealized foreign exchange gains of $8,313,297 includes
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange losses shown in the composition of net assets at
April 30, 1999 represent foreign exchange losses for book purposes that have not
yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate at April 30, 1999 was US$.6610 to A$1.00 for the Australian
dollar.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gains or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
or currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
Dividends and Distributions: It is the Fund's current policy to pay regular
quarterly distributions at an annual rate, which is a percentage of the rolling
average of the Fund's prior four quarter-end net asset values. The distributions
will be made from net investment income, net realized capital gains and, to any
extent necessary, paid-in capital. Dividends and distributions are recorded on
the ex-dividend date. Income distributions and capital and currency gains
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
10
<PAGE>
These differences are primarily due to differing treatments for foreign
currencies.
Taxes: For federal income and excise tax purposes, substantially all of the
Fund's transactions are accounted for using the Australian dollar as the
functional currency. Accordingly, only realized currency gains and losses
resulting from the repatriation of Australian dollars into United States dollars
are recognized for tax purposes.
No provision has been made for United States income taxes because it is the
Fund's policy to continue to meet the requirements of the United States Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders. Provision has been made for United States
excise taxes incurred during the prior fiscal year. Australia imposes a
withholding tax of 15% on certain dividends and 10% on certain interest.
Securities Lending: The Fund may lend its securities to approved borrowers. The
loans are secured by collateral at least equal at all times to the market value
of the securities loaned. The Fund may bear the risk of delay in recovery of, or
even loss of rights in, the securities loaned should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the six months ended April 30, 1999, the Fund decreased distributions in
excess of net investment income by $712,291, increased accumulated net realized
gains on investments by $235,707, increased accumulated realized and unrealized
foreign exchange losses by $903,354 and decreased paid-in capital in excess of
par by $44,644. Net investment income, net realized gains and net assets were
not affected by this change.
Note 2. Agreements The Fund has agreements
with EquitiLink International Management Limited
(the 'Investment Manager'), EquitiLink Australia Limited (the 'Investment
Adviser'), and Prudential Investments Fund Management, LLC (the
'Administrator'). The Investment Manager and the Investment Adviser are
affiliated companies.
The Investment Manager makes investment decisions on behalf of the Fund on
the basis of recommendations and information furnished to it by the Investment
Adviser, including the selection of and the placement of orders with brokers and
dealers to execute portfolio transactions on behalf of the Fund.
The Investment Manager pays fees to the Investment Adviser for their services
rendered. The Investment Manager informed the Fund that it paid $178,958 to the
Investment Adviser during the six months ended April 30, 1999.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 1.10% of the Fund's
average weekly net assets up to $50 million, 0.90% of such assets between $50
million and $100 million and 0.70% of such assets in excess of $100 million. The
administration agreement provides the Administrator with a fee at the annual
rate of the greater of $25,000 or 0.05% of the Fund's average weekly net assets.
Note 3. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the six months ended
April 30, 1999 aggregated $134,683,027 and $137,123,640, respectively.
As of April 30, 1999, the Fund had securities on loan with an aggregate
market value of $3,918,830. As of this date, the collateral held for securities
on loan was comprised of securities with an aggregate market value of
$5,277,623.
The United States federal income tax basis of the Fund's investments at April
30, 1999 was $141,868,202 and accordingly, net unrealized appreciation for
United States federal income tax purposes was $28,447,362 (gross unrealized
appreciation--$33,485,135; gross unrealized depreciation--$5,037,773).
Note 4. Capital There are 20 million shares of
$.01 par value common stock authorized. Of the
17,189,998 shares issued and outstanding at April 30, 1999, the Investment
Manager owned 45,135 shares. During the six months ended April 30, 1999 and
fiscal year ended October 31, 1998 the Fund issued -0- and 130,732 shares,
respectively, in connection with cash dividends paid in stock and as a result of
the reinvestment of dividends paid to shareholders enrolled in the dividend
reinvestment plan.
11
<PAGE>
Note 5. Dividend On June 10, 1999 the Board
and Distribution of Directors of the Fund
declared a distribution of US$.20 per share from
realized short-term capital gains payable on July 16, 1999 to shareholders of
record on June 30, 1999.
Note 6. Pending On January 22, 1999, a pur-
Litigation ported class action was
brought against the directors of the Fund, the
Investment Manager and the Investment Adviser alleging a breach of fiduciary
duty to the Fund in failing to take adequate steps to diminish the discount of
the Fund's share price to its net asset value. (Ariel Marquit v. Sherman et al.,
Civil Action No. 2:99cv00289, D.N.J.) The Fund was advised by counsel that the
complaint was without merit and the claim was subsequently dismissed by order of
the court.
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Years Ended October 31,
April 30, ------------------------------------------------------------
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
---------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 8.25 $ 9.35 $ 10.98 $ 10.04 $ 11.76 $ 11.37
---------- -------- -------- -------- -------- --------
Net investment income........................... .01 .21 .18 .20 .22 .14
Net realized and unrealized gain (loss) on
investments
and foreign currencies........................ 2.00 (.41) (1.45) 1.25 (.71) 1.84
---------- -------- -------- -------- -------- --------
Total from investment operations.............. 2.01 (.20) (1.27) 1.45 (.49) 1.98
---------- -------- -------- -------- -------- --------
Dividends from net investment income............ (.14) (.23) (.17) (.23) (.22) (.10)
Distributions from net capital and currency
gains......................................... (.26) (.66) (.18) (.26) (.94) (.11)
---------- -------- -------- -------- -------- --------
Total dividends and distributions............. (.40) (.89) (.35) (.49) (1.16) (.21)
---------- -------- -------- -------- -------- --------
Capital reduction with respect to issuance of
Fund shares................................... -- (.01) (.01) (.02) (.07) (1.38)
---------- -------- -------- -------- -------- --------
Net asset value, end of period.................. $ 9.86 $ 8.25 $ 9.35 $ 10.98 $ 10.04 $ 11.76
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
Market price per share, end of period........... $ 8.125 $ 6.5625 $ 7.44 $ 9.125 $ 8.19 $ 10.13
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN BASED ONPound:
Market value.................................... 30.41% (0.38)% (15.17)% 17.76% (7.84)% (0.56)%
Net asset value................................. 25.81% (0.34)% (11.37)% 15.55% (2.70)% 5.39%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets......... 2.55%* 1.61% 1.39% 1.41% 1.50% 1.45%
Ratio of net investment income to average net
assets........................................ .15%* 2.38% 1.68% 1.86% 2.24% 1.42%
Portfolio turnover rate......................... 89% 180% 270% 133% 45% 46%
Net assets, end of period (000 omitted)......... $ 169,462 $141,794 $159,422 $185,756 $168,111 $186,852
Average net assets (000 omitted)................ $ 155,277 $149,827 $182,588 $178,756 $162,228 $149,801
</TABLE>
- ---------------
* Annualized.
Pound Total investment return is calculated assuming a purchase of common
stock on the first day and a sale on the last day of each period
reported. Dividends and distributions are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets and
other supplemental data for each of the periods indicated. This
information has been determined based upon financial information
provided in the financial statements and market value data for the
Fund's shares.
See Notes to Financial Statements.
13
<PAGE>
Supplemental Proxy Information
The Annual Meeting of Shareholders of The First Australia Fund, Inc. (the
'Fund') was held on Friday, April 23, 1999 at the offices of Prudential
Securities Incorporated, One Seaport Plaza, New York, New York. The meeting was
held for the following purposes:
(1) To elect five Directors to serve as Class II Directors for a three-year
term expiring in 2002:
- Rt. Hon. Malcolm Fraser
- Harry A. Jacobs, Jr.
- Howard A. Knight
- Richard H. McCoy
- Brian M. Sherman
- Ronald G. Olin
- Ralph W. Bradshaw
- Gary A. Bentz
- William A. Clark
- Gerald Hellerman
Directors whose term of office continued beyond this meeting are as
follows: Anthony E. Aaronson, Sir Roden Cutler, David Lindsay Elsum,
Laurence S. Freedman, Michael R. Horsburgh, Roger C. Maddock, Nevile J.
Miles, William J. Potter and John T. Sheehy;
(2) To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Fund for the fiscal year ending October 31, 1999;
(3) To terminate the Investment Management Agreement with EquitiLink
International Management Limited;
(4) That the Board take whatever steps necessary for shareholders to receive
net asset value for their shares within 60 days of the meeting;
(5) That all directors not standing for reelection who oppose item Pound4
resign;
(6) To reimburse shareholder proponent's fees and expenses.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Auditor Votes for Votes against Votes withheld Abstentions
----------------------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
(1) Rt. Hon. Malcolm Fraser 9,578,300 -- 909,565 --
Harry A. Jacobs, Jr. 9,581,669 -- 906,196 --
Howard A. Knight 9,540,710 -- 947,155 --
Richard H. McCoy 9,542,048 -- 945,817 --
Brian M. Sherman 9,609,751 -- 878,114 --
Ronald G. Olin 1,765,148 -- 23,690 --
Ralph W. Bradshaw 1,765,148 -- 23,690 --
Gary A. Bentz 1,765,148 -- 23,690 --
William A. Clark 1,765,148 -- 23,690 --
Gerald Hellerman 1,765,148 -- 23,690 --
(2) PricewaterhouseCoopers LLP 10,072,998 252,978 -- 1,950,725
(3) Terminate Investment
Agreement 2,870,031 6,522,667 -- 401,415
(4) Net asset value within 60
days 3,224,049 6,330,907 -- 239,365
(5) Resignation of directors 2,874,034 6,580,953 -- 338,973
(6) Reimburse fees and expenses 2,437,404 7,061,267 -- 295,537
</TABLE>
14
<PAGE>
Directors
Anthony E. Aaronson
Sir Roden Cutler
David Lindsay Elsum
Rt. Hon. Malcolm Fraser
Laurence S. Freedman, Chairman
Michael R. Horsburgh
Harry A. Jacobs, Jr.
Howard A. Knight
Richard H. McCoy
Neville J. Miles
William J. Potter
Peter D. Sacks
John T. Sheehy
Brian M. Sherman
Officers
Brian M. Sherman, President
Laurence S. Freedman, Vice President
Ouma Sananikone-Fletcher, Assistant Vice President
and Chief Investment Officer
David Manor, Treasurer
Roy M. Randall, Secretary
Barry G. Sechos, Assistant Treasurer
Kenneth T. Kozlowski, Assistant Treasurer
Allan S. Mostoff, Assistant Secretary
Margaret A. Bancroft, Assistant Secretary
The accompanying financial statements as of April 30, 1999 were not audited and
accordingly, no opinion is expressed on them.
This report, including the financial statements herein, is transmitted to the
shareholders of The First Australia Fund, Inc. for their general information
only. It does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific person.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.
<PAGE>
- ------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Investment Manager
EquitiLink International Management Limited
P.O. Box 578, 17 Bond Street
St. Helier, Jersey, JE4 5XB Channel Islands
Investment Adviser
EquitiLink Australia Limited
190 George Street
Sydney, NSW 2000, Australia
Administrator
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Dechert Price & Rhoads
1775 Eye Street N.W.
Washington, D.C. 20006-2401
Stikeman, Elliott
Level 40, Chifley Tower
2 Chifley Square
Sydney, NSW 2000, Australia
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
for information call toll-free (800) 362-3277
collect (973) 367-7403
or for information regarding net asset value
(800) 451-6788
Shares of The First Australia Fund, Inc. are traded on the
American Stock Exchange and on the Pacific Stock Exchange under the
symbol 'IAF'. Information about the Fund's net asset value and
market price is published weekly in Barron's and in the Monday
edition of The Wall Street Journal.
For a weekly update of the Fund's net asset value
and share price, or to receive more information on the Fund, call
toll-free:
1-800-323-9995
318652104
